Don't worry, my insurance covers everything

Date published: 7 August 2007


If this statement sounds familiar when calamity strikes then all is not well with your risk management program. It is a fact that a well structured risk financing strategy puts insurance last, not first, among the sources of funds when recovering from accidental losses. The more you rely on your own resources to finance and transfer risk contractually, before purchasing insurance , the less expensive accidents will be for your company and the more you and your staff will become focused on preventing losses. This approach will, in the long run, mean that the premiums you pay away to insurance companies will largely relate to catastrophe type losses and that the cost of such insurance is reduced as insurers tend to reward clients who have excellent claim records. 

 Fact : Insurance does not cover everything 

Your insurance policy will never pay for all losses and in most cases will never pay for the entire loss where the loss is covered by insurance. You are almost always left with a share in one or more of the following ways: 

Policy Excess. Most policies contain excesses which in the main are designed to eliminate small losses. Some policies have large excesses which were either imposed by the insurer as an underwriting measure or as a mechanism to reduce your premium spend. Policy excesses compel you to share in the financial loss.

The Defined Event. Every policy contract will clearly define the risk it is insuring. This is often termed the “Defined Event”. Risks which fall outside the scope of the Defined Event are not covered in their entirety. The full financial outlay of the loss is then for the account of the business. 

The Policy Exceptions. All insurance policies contain a list of exclusions and General Conditions. A risk may be covered in terms the “Defined Event”, but excluded in the General Conditions or in the list of specific policy exceptions. Again such uninsured financial losses would be for the account of the company. 

Time. The time spent by you and your staff in formulating claims costs the company, particularly since key individuals are usually saddled with the responsibility. Their time is a valuable and costly to the business. 

The cost to prepare your claim. The onus is always on you, the Insured, to prove your loss. The cost of preparing your claim can be significant. Think of the documentation required following a catastrophe, affidavits in certain cases, forensic experts, accountant’s fees for Business Interruption claims etc. Claims Preparation Costs can be covered, but if they are they usually have a sum insured limitation. 

Contracts entered into. Your insurance contract does not supersede contracts you enter into i.e. you may enter into a contract where you transfer the risk of loss or damage to property, in the terms of sale, to the party you are contracting with. Generally, your insurance policy would then not respond to damage to property as contractually you would not be liable for the loss. Cargo shipping terms are a good practical example. Generally, your Liability insurance policy will also not respond where you have contractually extended your liability beyond which the policy would have paid had you not accepted liability contractually. In other words, you cannot increase your insurers liability exposure by accepting liability contractually as insurers will only respond to losses which would have attached without the existence of the contract entered into. These contractual losses would again be for the account of the company. 

Unsure about the interpretation of your insurance policy? 

Contact Chadwicks. We simplify the seemingly complex business insurance transaction into terms which are easy to understand. Moreover, we have the expertise to ensure that the contracts you enter into do not prejudice your insurance cover.   

Commetary based on extracts from the "Nonprofit Risk Management Center - G.Head"

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